24 May Too Much Convenience Kills Value
If we’ve learned anything from the Pandemic, it’s market demands are evolving and we continue to experience stormy economic headwinds. Companies are facing increased risk factors including tight labour availability, disrupted supply chains, higher interest rates and operating challenges from rising inflation. Overall sentiment about the economy remains generally positive but with downward trending. We’ve never experienced the uncertainty of transitioning out of a global pandemic with geopolitical instability.
Our Covid toddler year is showing us something new and different. In May 2021, the price of a liter gas in Ontario could be bought for a loonie and a quarter. Now, we sit poised to hit another record high over well over $ 2.00/liter as we approach the Victoria Day long weekend. Just in time for cottage season. Last year it was tech stocks that were setting record highs. So far this year, FAANG stocks have collectively shed $ 2.2 trillion in market value. Times are changing and the tech sector is experiencing an correction in reality. Netflix is shedding thousands of subscribers, Amazon’s had its first successful unionization vote occurred and Uber is partnering with traditional cab companies.
Edelman’s Trust Barometer indicates that public sentiment for tech companies is being adjusted in a meaningful way. With concerns over artificial intelligence, data breeches and privacy issues, support for tech companies is significantly declining. Their 2022 report indicates that trust in technology reached all-time lows in 17 of 27 global markets with Canada seeing a 15% loss in support since 2019. A Pew survey poll conducted in July 2019 found the percentage of Americans who think technology companies have a positive effect on the United States has fallen from 71% to 50% since 2015. There’s a widespread and growing negative reaction to the influence of AI-enabled algorithms to what we see, read, watch and buy.
Convenience as Business Model Innovation
In many decades of business school teaching, there were only three pillars or strategy ingredients employed in building successful value propositions – Product, Price and Service/Experience. Companies would choose a stake of authority in one of these areas to competitively differentiate their products and services to their chosen market. A company could be an Apple with product superiority which commanded a premium in the market, Wal-mart with defensible price positioning or as 89% of B2B companies chose, differentiate on customer experience.
Technology changed this equation by introducing a new lever of influence in the form of Convenience. Once people could download digital content, it was natural this desire would extend to receiving physical goods quickly. Companies could distinguish offerings based making a service easier to use or delivering a faster experience to a desired outcome. By investing in technology-enabled infrastructure and harnessing insight from advanced analytics, a business could build value exchange marketplaces. A company didn’t need to create anything, their value was in serving as an intermediary between buyers and sellers or producers and consumers. The sharing and gig economies were founded on convenience-based, value-exchange intermediaries. Examples include unicorns such as Uber, Airbnb, Door Dash, Robinhood et. Al.
No company better embodies the early-adopter gains of a convenience ethos than Amazon. Their core values are uniquely focused on making things easier to do. They are dedicated to speed, choice, convenience and accessibility. Using access to abundant transactional customer data combined with business insight, they understood that reducing friction and making something easy to do, means people will do more of it. Knowing people hate entering data and wanting to reduce cart abandonment, they introduced the patented (now expired) one-click ordering and then zero-click subscriptions. At one time, convenience may have been about reducing physical labour but it’s become about saving the expenditure of mental resources. Whatever we wanted was one-click and a day away.
Many of us are spoiled by the immediacy of instant gratification and are irritated with tasks that we perceive to require unnecessary time and effort. Our appetite for convenience engenders more convenience becomes a developmental feedback loop. Economies of scale and powerful habit-inducing algorithms make it easier to repeat the desired behaviour they induce. As every task becomes easier, a heightened expectation of convenience exerts pressure on everything to get easier or get left behind. When you can order anything for next day delivery, should we be surprised when people don’t line up to vote.
Convenience and simplicity drive up conversion rates because it’s easier and faster for a customer to go from considering a purchase to completing it. It can also result in unintended consequences such as creating more buyer’s remorse and waste. But free shipping and Amazon’s commissions are not free, these costs are born by customers, employees, communities and shareholders. One widely circulated statistic suggests that 30% of everything Amazon sells ends up in a landfill. You’d believe it, if you ever stood in a line-up at the local post office, sandwiched between people with over-flowing shopping carts of Amazon returns. The biggest barrier to adoption a net-zero carbon lifestyle is that it’s inconvenient.
The single biggest convenience of the 1-click ordering system is granting third-party resellers access to Amazon customer data. These sales garner average margins of 20%, four times higher than the direct online store sales. We pay for convenience in the form of giving away private information that we don’t accurately value to be used in ways we don’t completely understand. And over time, the value we expect to receive goes down while prices go up. The downside of one-click checkout is that it doesn’t give merchants the chance to fully communicate important information about orders or products to customers.
Friction Creates Sustainable Value
When purchasing things of little importance with no real risk, removing friction delivers a faster experience and constructs a preference to buy from a company. We tend to think of friction as a bad thing because we don’t want to be perceived as making it hard for customers to give us money. As illustrated by tech companies, they assess every step of the buyer’s digital journey and remove barriers to growth driven by cart abandonment or failures to sign up for newsletters. Unfortunately, negative outcomes can occur as a result of a genuinely frictionless customer experience including incentivizing transactional behaviour and producing unreasonable customer expectations.
Friction can be a powerful persuasive tool, which is used to establish credibility, communicate value, to guide customers through the selection of better options and customized solutions. Over the last hundred years, marketing was more about introducing friction to protect margins versus perpetuating a culture of convenience. The less friction there is, the more firms compete directly with each other. Developers and economists found that disorienting shoppers by exposing them to cluttered environments, busy shopping malls and presenting them with lots choices resulted in much higher revenue. It was widely acknowledged that a market with a lot of friction made it harder to shop around. Demonstrating company’s profits would suffer whenever frictions were too high or low but at moderate levels, a company’s profits would increase.
Introducing meaningful friction is purposefully slowing down the user experience in way that’s valuable to the customer and positively influences the brand experience. Psychologists found that when people exert effort in creating something, they tend to value it more highly and it’s been appropriately named the IKEA effect. When customers invest more time and effort into collecting and building the furniture it causes them to place a higher value on these items. In behavioural science, when humans do something difficult or taxing, they want to believe there was a good reason for the effort. Cognitively, we want to justify the investment of time and energy. It makes the outcome more important.
Friction in the form of smoking bans and tax increases led to governments to see a steep decline in cigarette consumption. The way you stop speeding is to make it less convenient to do so, by introducing speed bumps and traffic calming zones. The Apple store sells exactly the same products as every other retailer but charges more money, that’s positive friction. It’s about pushing back against practices that commoditize value. We encourage customers to take the time to consider their purchase, knowing that a greater investment of effort leads to increased perceptions of trust and value.
Business processes design natural points of friction, which are intended to protect company profitability such as credit checkbefore shipping an order or requiring a customer to produce a receipt before processing a refund. Being too available lowers margins, relinquishes power to the buyer, drives up costs, encourages transactional behaviour and delivers a death blow to affinity with a company’s brand. When a business uses friction like registering for an account, providing credentials to download a white paper or watch a video, it declares the quality of the product or service is worth it.
Bringing the Message Home
The greatest friction that exists for a B2B service-based business is holding customers accountable for fairly-compensated access to value. It demonstrates branding in action through communicating a common standard of value-exchange with a shared responsibility of participants. A first-principle commitment builds communities of loyal customers who are joined in equitable standards of service. They respect investments of time and resources to build good working environments for employees. They appreciate supporting companies that clearly exhibit business value and deliver reliable outomes.
Covid-19 introduced friction into all our businesses – supply chain disruptions, tight talent market, delayed shipping times and copious amounts of uncertainty to the ways we deliver value. It’s shifted our perspective and granted us the opportunity to evaluate our approach to sustainable value creation. Market friction is helping to educate customers on realistic timelines and revising our expectations. People are looking to align with companies that offer a measure of certainty with minimal business risk. We’ve experienced what’s an essential service and come to appreciate what really matters.
Strong and sustainably profitable companies are focused on building deep and trusting customer relationships. Respect for customers and building value starts when we ask for permission-based consent versus the shortcut of using a compiled email list. Conversations to understand client needs, meeting with stakeholders to build consensus before responding with a proposal is positive friction. Ideal customer profiles, authentic discovery and well-defined value propositions protect brand value and defend price positioning.
Supporting Your Success
Many businesses share a belief that delivering a great customer experience is a frictionless transaction. Convenience focuses on speed and upfront price over quality and long-term value. Sophisticated marketing offers strike the right balance between protecting brand value and negatively influencing the perception of easy to do business with. Insightful business owners are optimizing their opportunities by sharpening their brand messaging as an investment in loyal customers and sustainable profitability. Purposeful Selling specializes in B2B Marketing Strategy and Sales Process for family-run, service-based businesses with an emphasis on competitively-defensible value propositions. Productive relationships start with an open conversation and that’s where we begin.
The secrets of big tech | The Economist